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Tuesday, May 12, 2015

The Rise of Remittances

The total number of migrants working in other countries worldwide is now approaching 250 million. Many of them send money home, and remittances are on their way to becoming an important part of the global financial system. The World Bank Migration and Remittances Team, Development Prospects Group, offers an overview in its Migration and Development Brief of April 13, 2015.

Here's a pattern showing the rise in remittances over time compared to some other international financial flows. Back in 1990, international remittances were lower than official development assistance (ODA). Flows of foreign direct investment (FDI) to developing countries were also smaller than ODA, as were flows of private debt and portfolio equity to developing countries. (The FDI flows to developing countries show here exclude China.) Remittances have been larger than development assistance for some years now, and the gap is growing. Perhaps more surprising, remittances also outstripped debt and portfolio equity flows to developing countries in recent years. The flows of remittances also look quite stable compared to other private-sector capital flows.

As one might expect, the amount of remittances will be biggest for some of the larger economies in the developing world, but expressed as a share of GDP, the amount of remittances will be largest for some smaller economies.

Remittances are important for their sheer size, and because they offer a way for extended households and kinship networks in low-income countries to help themselves in a direct way. They are also goign to be a subject of policy.

For example, the World Bank estimates that at present, transferring $200 to a recipient country on average incurs a fee of about 8%. It seems plausible that technology and the growth of these markets should be able to reduce this cost substantially. If the cost of transfers could be cut to 3%, OECD estimates that it would benefit the recipients of these remittances by $20 billion per year. The key question here is that making international flows of capital cheaper and easier comes into conflict with the policy agenda of avoiding money-laundering and cutting off financial assistance to terrorist groups.

Another possibility is that low-income countries will issue bonds in their own currencies, hoping to attract investment from those with remittances to send. The World Bank researchers explain: "A diaspora bond – a low denomination security with a face value of $1,000, say, carrying a 3-4% interest rate and 5-year maturity – issued by a country of origin could be attractive to migrant workers who currently earn near-zero interest on deposits held in host-country banks. Diaspora bonds could be used to mobilize a fraction – say, one-tenth – of the annual diaspora saving, that is, over $50 billion, for financing development projects." India and Israel have already taken steps along these lines, but many low-income countries around the world could give it a try.

A more complex step is to use the expected inflow of future remittances as collateral, in what is known a "future-flow securitization of remittances"--which can then lead to lower borrowing costs or longer borrowing terms for governments of developing countries.

For a more detailed overview of the economics of this subject, I recommend Dean Yang's article on "Migrant Remittances" in the Spring 2011 issue of the Journal of Economic Perspectives. (Full disclosure: I've labored in the fields as Managing Editor of JEP since the first issue in 1987.)